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How The US Fed Rates Impact Consumers And Investors?

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The Federal Reserve has hiked its benchmark interest rate by 75 basis points for a second straight time in its most aggressive drive in three decades to tame high inflation.

 

The decision to hike the key rate, will have its impact on consumer and business loans, which is likely to now move higher.

 

Fed hike can lead to a recession in the US

The US Fed has been grappling with high inflation, which is now at 9.1 per cent, the fastest annual rate in 41 years, and reflects its strenuous efforts to slow price gains across the economy.

By raising borrowing rates, the Fed makes it costlier for thgose looking at a mortgage or an auto or business loan. Consumers and businesses then tend to borrow and spend less, cooling the economy and slowing inflation. However, while on one hand inflation slows, as consumers borrow less at higher interest rates, it also tends to slowdown the economy.

This leaves investors and economists worried on the possibility of a recession somewhere down the line. Whether it actually happens remains to be seen, though it cannot be ruled out.

Economists at Bank of America foresee a "mild" recession later this year. Goldman Sachs analysts estimate a 50-50 likelihood of a recession within two years.

Tends to dampen sentiments for stock market investors

As interest rates rise, so do bond yields. This means investors move money from stock markets to fixed interest yielding instruments as interest rates tend to get lucrative. This obviously means selling pressure in the stock markets, which tends to drag them lower.

Says Sandeep Bagla, CEO - Trust Mutual Funds, "With the objective of bringing down CPI inflation to about 2%, the US Federal Reserve has been tightening rates and reducing liquidity. The hike of 75 bps was as per market expectations and hence was greeted by a short covering rally in the US markets, In India, equity markets which have been gradually seeing lower levels over the last few months are witnessing a strong pull back rally today. However, the Increase in US rates and tightening of global liquidity in form of Quantitative Tightening will lead to dampening of demand, which should lead to lower growth and profitability for the corporate world. Also, the opportunity cost of deploying money in markets will go up. Slower growth prospects, lower profitability and higher discounting rates generally lead to lower stock markets. Over the next few months, as global central banks hike rates, even if as per market expectations, do not augur well for risky asset classes like equities."

Increases loans and cost of borrowings

Depending on the type of loans, they tend to get higher in the US, as and when the US Fed hikes rates. However, the impact may not be the same as the quantum of hikes. Rates on mortgage loans tend to go up, though it may not be always the case, as these are long-term loans. However, auto loans and other from of personal loans, which are more of short term in nature tend to move higher. Overall, it is hard to see interest rates on these loans not moving higher, especially, if the quantum is as high as 75 basis points as delivered on Wednesday.

According to an AP report the Fed's move will raise its key rate, which affects many consumer and business loans, to a range of 2.25 per cent to 2.5 per cent, its highest level since 2018.

India is unlikely to be impacted to a great extent

According to Rajiv Shastri, Director and CEO - NJ AMC, the rate hike by the US Federal Reserve is as expected. "The quantum will not be replicated in India since the US and Indian economies are very differently positioned. The Federal Reserve was well behind the curve and is trying to catch up and subdue inflation which threatens to become systemic. In India, the RBI has stayed ahead and as a result, we don't see policy rates in India increasing as much as in the US. As such, the impact on the Indian equity markets will be limited to the spillover from the US markets with domestic conditions remaining neutral at the moment. Investors need not respond to this as these are transitory conditions and will resolve themselves in time. The Indian economy is poised for a long period of growth and acting on such transitory impulses may deprive investors of the long term benefits that are expected to accrue."

Overall, do not expect much of an impact on the Indian economy as a whole.

Cryptocurrency assets to tend to get impacted

Since crypto currencies are risky assets, there is a flight away from risky assets, once interest rates rise. In fact, bitcoin has slumped from levels of $65000 to around $21,000. This has largely been in anticipation that the US Fed would be aggressive in hiking interest rates as inflation surges. Cryptocurrencies are almost similar in terms of investment strategies as equities, where both are concerned as risky assets, though Cryptos are far riskier.

How The US Fed Rates Impact Consumers And Investors?

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